29 entries from November 2012

November 30, 2012

The following is a guest post by FMF reader Apex. He has been investing in rental real estate for more than four years and is authoring a Real Estate 101 series, posting every Friday, based on his experiences. (To read the series from the beginning, start here.) The series is designed to give prospective investors the basic tools they need to succeed.

There are entire sections of state statutes dedicated to the landlord tenant relationship in addition to federal laws such as anti-discrimination laws. The statutes offer protections for both landlords and tenants but they typically offer more protections for tenants. However, landlords have one major legal advantage on their side. The tenant will be signing a contract that they likely had no input into. You as the landlord write the entire lease contract and decide what the rules are as long as they don’t violate any of the state statutes of which there are many.

As such it is extremely important that you have a solid lease. This is not something you should just throw together. You should not go to an office store or the Internet and get a generic lease and simply use that. This is your one chance to protect your rights. Doing this carelessly could be a costly mistake.

There are 4 things I want my leases to do.

Follow Local Statutes

They must conform to local statutes. There are many things you may try to put in your lease that are simply against the law in your state. It’s not illegal to put them in your lease, but a judge will just throw them out if you end up in court. If you do not know what the statutes are many sections of your lease that you think are protecting your rights will likely be found invalid in court. It’s better to find out what is legal and stick to that. The best way to do that is to find local leases that have been written or approved by your state attorney general or that are being written by local multi-housing associations.

Clarify All Money Issues

The rent must be clearly spelled out obviously. In addition all items concerning the security deposit should be clearly spelled out. This includes how much it is, what it can be used for, how much interest will be paid on it if any, and how and when it will be returned. Most states have very strict statutes around security deposits so make sure you are in line with what is required by law. You should also address utilities. If any are included in the rent list those. If some are added to the rent as an additional fee that should be listed. You should state that any utilities not listed in the lease are the responsibility of the tenant lest they get the idea or claim that you told them certain things were included. Finally all fee related items need to be clearly spelled out. Late rent fee and returned check fee are the two big ones to address here. Make it clear what the dollar amount of the late fee is, when it is applied, and how rent needs to be paid if it is late. Some leases require a cashier’s check once rent is late. I do not do this but if you do, it needs to be in your lease.

Set the Basis for Termination

This is an important item that often gets overlooked. Your lease should make it very clear that a violation of any clause in your lease is reason for you to terminate the lease and to pursue eviction if necessary. If your lease does not spell out what the consequences of violating parts of your lease are, you should not assume a judge will allow you to evict for it. There are certain things like not paying rent that are almost always in state statutes as cause for eviction. However, if you have a no pets clause and your lease doesn’t have a termination and eviction clause for violations, it is unclear that a judge will let you do anything about that violation let alone evict for it. Ideally you don’t want to go to court at all. If your lease has a termination and eviction clause you can make it clear to your tenant that you will terminate and evict if they don’t rectify the situation. Without that clause an informed tenant may very well ignore you and point out that there is no penalty in your lease for violating the no pets clause. So make sure your lease always spells out that you have the right to terminate and evict for violations of any clauses in your lease.

Set Expectations

There are some things that are not really a legal issue. For instance my lease states that the tenants are responsible for changing light bulbs and smoke detector batteries as they quit working. This isn’t really an eviction issue, but it makes it clear that they are not to call me to deal with these types of issues. My lease makes it clear they are not to alter the property in any way including painting without prior written approval. I point out all the sections that have expectations when we sign the lease because not all tenants will read their leases. There are other expectations in my lease as well. The point of these is to make it clear what they are expected to do and what they are not allowed to do. This is an important part of your lease because verbal expressions of what is expected won’t carry the weight of items in the lease that have been pointed out to them. Some may still violate them but most good tenants will not.

Building the Lease

In order to do these four things, I start with a lease approved by the Attorney General of my state and then I modify it to meet my needs. The fact that the Attorney General approves of a lease is not the same as a guarantee that all of it’s clauses will stand up in court, but it is a pretty good bet since they will have written it with very detailed knowledge of the statutes that are necessary. Some people would argue that it is best to use an approved lease without alteration, but the lease does not do everything I want it to do, and it also has some protections in it for the tenant that I take out. For instance the lease that my state Attorney General produces states that either side can win legal costs if they win in court. The statues in my state already make it clear that a tenant can do this if the lease gives the landlord the right to do it. Whether or not I specifically state this right for the tenant in my lease, they have it. Stating it just draws their attention to it, and I would prefer not to do that. In addition there are the things I mentioned above that I want to add to the lease simply to set expectations.

It is important that you do not alter the lease in ways that remove the parts that are necessary in your state. If you don’t know what is necessary then it’s probably best to just add to and not remove from a state approved lease.

Your lease protects your rights and tells your tenants what you expect from them. This is your only chance to do this, so make sure you do not do it carelessly.

November 29, 2012

I am in a committed relationship (not married yet, but engaged, got the ring :)) and we are currently living together. I have lived with people before (and usually took care of the bills) but he has never lived with anyone before (I'm 35, he's 33).

Right now I have the 'steady' income (unless I miss work, I'm hourly) .. menaing I make a pre-determined amount every bi-weekly.

My fiance works on commission. He (as a general rule) does generally bring home triple what I make, and he also gets paid weekly, (so nice) .. BUT .. there are weeks when his business is slow that he may end up bringing home lot less. His checks can range anywhere from $200 (lowest so far) all the way up to $1900 (highest so far) per week.

When we moved in together, knowing I made the steady income (and he was new at his job), I set the bills up as follows:

I pay all the utilities, half of our house(+HO ins/prop taxes) payment (we just bought a house), and the bills I brought into the relationship.

He pays half the house(+ HO ins/prop taxes) payment, the bills be brought into the relationship, and our groceries.

After the bills are paid (by whoever they fall on according to the rules set above), the agreement was that should I (or he) need anything, or we need anything for the house he would pay for it (since he basically has all the 'extra' income sitting in his bank account, since 90% of my income is tied up with utilities and house note).

He is also responsible for alloting part of each paycheck (if allowable, obviously if he makes $200 it's not feasible) into a savings account; so that in the occurance that either of us get sick (since neither are salary) that we still have money to cover the monthly bills .. or if we want to buy something large (like our new TV).

The problem lies not with me, but lately with him. We made the agreement that should I need to purchase something that I could (within reason of course) make the puchase .. lately though, he has been giving me grief about it.

He has basically been trying to micro-manage my spending. He has online banking and after going to the store on one trip, them over charging me then having reverse the charge and re-charge me .. he called me (about 15 minutes later) wanting to know what I was spending money on .. meaning .. he was literally on his phone watching what I was doing as I was doing it (he has online banking).

Basically I now feel like I have to 'ask permission' in order to spend something, then I also feel the need to justify my expenditures once I make them. I don't think I should have to feel this way.

I thought this setup was working until this happened. Now, since this happened(knowing that he was/has been 'watching over my shoulder' while I was out with 'his' debit card) he is completely freaking out about the money situation, and I am seriously re-considering the way that we have things set up.

He offered to give me $150/week to spend, gave it to me .. then hounded me everyday about how much of it I had already spent and constantly asking what I spent it on; although I never question him about his daily spending habits, I honestly don't care .. we make enough money (between us) to be able to buy what we want.

He honestly acts like we are destitute sometimes, and that too is driving me/us bonkers. He also, IMO, trys to put too much into savings at a time; which is why it seems like to him we are always 'out of money'.

I came online, and here, looking for a logical way to split up our bills (since the way I had it set up seems to be failing miserably and causing our relationship uneeded stress) .. so that he isn't always upset because I'm spending money (admitedly, I do go to the store fairly often, buying this and that as we need it), and me getting upset in return; because I don't have any money to spend (the monthly bills I pay take almost all of what I make) and will always have to 'ask' him for it and feel the need to justify why I'm asking (which I never thought would be an issue until he made it an issue).

So I guess my question is .. does anyone have any ideas on how to relieve some pressure on this situation?

Also, what is a good % to put into saving monthly (on average)? So that he isn't stressing himself out (and in return me) about how much he should or shouldnt' be putting away.

Have you heard of peer to peer (p2p) lending but don’t know much about it? Maybe you read an article somewhere and thought it sounded interesting. But you probably wondered how to really get started. Then this post is for you.

First we should define what we mean by p2p lending. It is actually very simple. Sites like Lending Club and Prosper bring together people wanting to borrow money with people looking to invest money. This is all done online in a safe and secure way that benefits both parties. Borrowers get access to a loan at a better interest rate than they could likely get elsewhere and investors get a higher return on their money.

So how do people looking to invest get started? Well, you open an account at Lending Club or Prosper (the two companies available to U.S. investors) and start investing in loans. But before you do that you should learn about some p2p lending best practices. Below are five points that all investors should consider before they start investing.

1. Diversification

If you take nothing else from this article other than this point you will be well on your way to being a successful p2p lending investor. Both Lending Club and Prosper have a $25 minimum investment per loan. Don’t go above this minimum unless you are looking to invest $10,000 or more. I can’t emphasize this enough. You want to stay fully diversified so in the event of a borrower default the impact on your portfolio will be negligible.

Here is a quick example. Let’s assume you have $5,000 to invest. You could invest in 20 loans at $250 each or you could invest in 200 loans at $25 each. If you get an immediate default and you have only 20 loans you will be down 5%. With 200 loans you will only be down 0.5%.

2. Know your risk tolerance

Both Lending Club and Prosper assign a loan grade for every loan. At Lending Club it is grade A for the most creditworthy borrowers down to the grade G for the highest risk. At Prosper the range is AA to E and then HR being the highest risk borrowers.

Some investors take defaults personally. They loaned their money to a borrower in good faith and then the borrower decides to not pay. It is just not right. If you are one of those people then maybe you should stick with only the most creditworthy borrowers. You may still receive a default but default rates for these borrowers are typically less than 1% annually.

3. Do some research

One of the great parts of investing with p2p lending is the transparency. Both companies make their entire loan histories available for public scrutiny. Consequently, an entire eco-system has been developed and there are many free sites where you can analyze this data. For Lending Club investors there is Nickel Steamroller and Lendstats; for Prosper investors there is Prosper Stats or NumberWhale.

If the thought of choosing a strategy or sorting through hundreds of available loans feels overwhelming you can always copy me. I share my p2p lending investment strategy and I am happy for you to use this as a starting point.

4. Qualitative or quantitative investing

There are two kinds of p2p lending investors. Those who like to invest based on the data (I call these people quantitative investors) and those who like to read the loan descriptions to try and get a feel for each borrower (I call these people qualitative investors). Of course, you can do a combination of the two. For new investors it is useful to start as a qualitative investor and read some of the loan descriptions to help familiarize yourself with borrowers.

Having said that I am a purely quantitative investor. I am not recommending this as the best method but it is what works for me. Here is my reasoning. I have many accounts and I invest in 30-40 loans every week. If I were to spend even five minutes on every loan it would take me several hours every week to make my investments. Some people are happy to do that but for me I run filters on the available loans and invest in every single loan that meets my criteria.

5. Keep your expectations in check

Once you have made your first investment in loans you will see your returns displayed prominently every time you login to Lending Club and Prosper. You will likely be very excited about this number because it is more than you receive from your other investments. But I have some bad news. This return number will most likely reduce over time.

Unless you are very lucky and have a small portfolio you will see defaults impact your returns. Even if you have invested in only A-grade loans. The first defaults will hit the hardest. This is because new loans still have most of their balance outstanding and when a borrower defaults that outstanding balance is deducted from your account balance. Typically, returns reduce over time by several percentage points depending on your mix of loans. Just keep that in mind when you get excited about your returns.

Peer to peer lending is an investment that is growing in popularity all the time. Lending Club just recently crossed over $1 billion in new loans issued and both them and Prosper continue to experience rapid growth. In this low yield environment investors are looking for ways to boost their overall returns and p2p lending provides that opportunity. And if you keep these five points in mind you have an excellent chance of earning great returns, too.

November 22, 2012

Just want to wish you and your family a blessed and very happy Thanksgiving. May we all take a break from talking about money and focus on the things that really make us thankful. Here's my list -- still the same after all these years (except maybe the KFC part.) ;-)

November 21, 2012

The following is an excerpt from the book How Much Money Do I Need to Retire? (60 Minute Financial Solutions) by Todd Tresidder. It is an easy and valuable read for anyone wanting to get an accurate estimate of their retirement number. I have incorporated tips from Todd's retirement teachings myself as I've planned my own retirement (I've run through various scenarios plus started real estate investing) and thus I highly recommend this book.

Let me share a story with you. My Ultimate Retirement Calculator often gets featured in reviews about retirement calculators. All too frequently a misinformed writer wages criticisms like the following:

It doesn’t include separate inputs for each spouse. (Answer: Who needs the complication? Just aggregate both spouses together. It’s called community property for a reason.)

It doesn’t provide separate tax rates before and after retirement. (Answer: Who cares? Different tax rates would only be marginally meaningful if your income fell dramatically after retirement. Are you planning on poverty?)

It doesn’t include varying asset allocation with age. (Answer: You can’t even model the performance of a single asset allocation accurately for 30 years. The idea that you can model a changing allocation with any greater accuracy is lunacy.)

Each of these critics is making the same mistake. They believe in the magic number myth. They seek to add more details and sophisticated modeling in the vain pursuit of increased accuracy when no such accuracy is possible.

The cause for this erroneous reasoning is they don’t understand how retirement planning math works in practice. All those little details are dwarfed in significance by one or two critically important “big numbers” that will make-or-break your analysis. Get these big numbers right and all the other details barely matter. Conversely, get just one of the big numbers wrong and your analysis will fail completely no matter how many small details you got right.

What are those critically important numbers?

Critical Number 1: Percentage of income saved versus income spent.

In the article on my website, How Anyone Can Retire in 10 Years (or Less!), I demonstrate how a super-aggressive savings rate would allow you to skip all the calculators by reducing retirement planning to one simple ratio that forecasts with scientific precision how long it takes to become financially independent. The numbers are as follows:

10% savings rate = 42 years

20% savings rate = 32 years

40% savings rate = 21 years

50% savings rate = 17 years

60% savings rate = 14 years

70% savings rate = 10 years

80% savings rate = 7 years

(Please note, these numbers are only scientifically valid for very high savings rates (i.e., 60%–80%) because longer time horizons introduce complications from compound returns and inflation. Lower savings rates (or longer time horizons) are shown for illustration only. See the full article for all the details.)

This is not some crazy math theory. It explains exactly how I retired at age 35. I saved roughly 70% of a substantial income and never allowed spending to rise with income. It didn’t take long for my assets to grow sufficiently large to support my lifestyle.

It’s a brain-dead simple, scientifically accurate way to retire young and know with certainty how much money you need to retire. No fancy math, impossible assumptions, or retirement calculators required. It just plain works.

The principle taught by this critically important number is if you want to retire faster, then reduce your spending or raise your income so your savings as a percent of income grows. The higher the percentage, the faster and more reliably you’ll reach the goal.

Again, don’t get hung up on distracting details. Just pay attention to your savings rate in relationship to your earnings and spending needs. It’s a critically important number.

Critically Important Number 2: Return on investment minus inflation.

The reason I spent so much time explaining the investment return assumption earlier in this book is because it’s the most important number (along with inflation) determining your retirement failure or success. The relationship between inflation and portfolio return will literally make or break your retirement. It is The Big One. Nothing else comes close when planning retirement with paper assets.

The reason is simple—compound returns multiply little differences into huge differences over long periods. This isn’t about turning mole hills into mountains; this is about turning grains of sand into the Himalayas. I’ll repeat that point for emphasis because I don’t want you to miss it. Both inflation and return on investment have a compounded effect on your estimate for how much money you need to retire. That’s why they’re so critically important.

But don’t take my word for it. Prove it to yourself right now. Go to my Ultimate Retirement Calculator and enter the numbers that best represent your life situation. Seriously, do it before reading any further. Don’t worry about perfection. Your best estimates from earlier in the reading are good enough for this exercise.

When inputting expected lifespan, use age 100 unless you have known health issues. Notice how the calculator allows you to reduce spending during retirement just like the research by Bernicke indicates. If you’re just reading along but not taking action, then you’re shortchanging yourself because you’ll get a lot more value from this if you do the exercise right now. Please, don’t just trust me; prove it for yourself. It’ll only take two minutes and could be the most eye-opening two minutes you spend all week.

Once you fill out the calculator with your base level numbers, then write down the “magic retirement number” that it provides.

Next, try perfecting your magic number by tweaking a few variables like tax rate, retirement age, and other details similar to the critical comments cited earlier. The only rule is you can’t touch the two key inputs highlighted in this chapter: return on investment and inflation. Everything else is fair game.

Notice that your magic number changes with each variation, but the changes are only marginal. Your estimates for how much money you need to retire remain in the same ballpark as your original number. The calculation is relatively stable.

Now, using the exact same inputs as before, raise your inflation rate by 2% while simultaneously reducing your return on investment by 2%, but make sure you’re sitting down first.

See what I mean? For most people, this small change will literally multiply the amount you need to retire several fold. It should knock your original estimate right out of the ballpark, over the river, and into the next state.

That is why I call all the other variables “details” and label these two ratios “critical.” It’s just the way the math works.

Principle: Small changes in a few key numbers multiplied over long periods of time have huge impacts on your ability to retire with financial security. Therefore, focus on those key variables and don’t worry about the minute details.

The conclusion is clear: If you’re going to plan your retirement using the traditional asset-based model, then retirement calculators should only be used for scenario analysis, not determining your magic number.

Use retirement calculators to model a wide range of variables to produce a confidence interval estimating the assets you supposedly need.

See what happens if you add 10 years of additional income—part-time work, consulting, or whatever might interest you—to take the pressure off savings and allow your assets more time to grow.

Try modeling real estate rental income that adjusts for inflation and rises when you pay off the mortgage.

Try modeling what happens when you receive a lump sum inheritance or sell a home or business.

Try modeling the difference between a conventional asset allocation and a dividend growth portfolio.

Try modeling if it’s better to delay Social Security or start payments early.

Try modeling several factors together.

In other words, use the retirement calculator to put numbers behind different life plans for your financial future. Each example will teach another principle just as the examples provided in this chapter and the next chapter teach principles. Retirement planning done right is really about life planning, not calculating magic numbers.

That is how you use retirement calculators properly, and that is why my Ultimate Retirement Calculator is designed specifically to facilitate a simple process for scenario analysis. It allows you to easily model different life scenarios and see how the numbers work.

The Ultimate Retirement Calculator is designed with three specific objectives in mind:

1. It omits meaningless complication and non-essential detail, thus reducing barriers to completing the calculations. It’s more important to plan retirement roughly than not do it at all. It’s also important to not get so caught up in minute details that you deceive yourself into believing the output is scientifically accurate.

2. It provides a simplified platform so you can model various real-life scenarios using all three asset classes (not just paper assets, like competing calculators). No other calculator allows that flexibility that is essential for the way modern retirements are planned.

3. It allows you to quickly and easily build confidence intervals by varying single inputs and seeing how it affects overall output.

In short, this calculator is designed for scenario analysis—not mythical magic numbers—because that’s what is useful when estimating how much money you need to retire using a traditional asset-based approach. The common mistake is to make the process all about asset accumulation when there’s far greater value in the life planning aspect.

Calculators are best used for mapping a path and putting numbers behind your life plan. They’re indispensable for seeing the financial impact of what-if scenarios so you can make better informed decisions about your future.

Scenario analysis is how you blend life planning with retirement calculators to engineer a realistic roadmap for achieving financial security. It’s a practical approach for retirement planning that avoids the myths and traps that have unfortunately become conventional wisdom. It acknowledges the inherent limitations in designing an asset-based retirement plan and provides a practical solution.

Now that you know scenario analysis is the right approach for using retirement calculators, below are 4 rules to help you implement that scenario analysis wisely.

Walk Forward Process: Don’t perform the retirement savings goal exercise once, put it on a shelf, and then forget it. Instead, check back every few years and see what assumptions proved valid and which ones did not. Adjust your assumptions, recalculate, and shift your plans accordingly. Rinse and repeat every few years. This way you’ll hit your retirement target like a rocket constantly course correcting toward its target.

Errors Multiply: Small errors in estimates compound into large errors in results. Retirement savings are built and spent over multiple decades. A 2% error in inflation or investment return that is manageable over 5–10 years is a complete disaster when compounded over 30–40 years. That’s why you must regularly recalibrate over time based on actual results. Small details in key numbers cause huge differences, so pay particularly close attention to the key numbers.

Teach Principles: Retirement calculators are invaluable for teaching essential retirement planning principles. Users quickly grasp how real return net of inflation is the most important number after just a few quick scenario tests. They also see the importance of time in compounding their way to wealth versus saving their way to wealth without the benefit of compound returns over time. They see the erosive effect of inflation by watching how their spending escalates out of control. Without a calculator these concepts are difficult to grasp, but with a calculator they become obvious for even a layman.

Maintain Flexibility: Avoid calculators that limit your ability to change assumptions. It’s shocking how many calculators pre-program assumptions for investment return, inflation, longevity, and other important inputs. When an assumption is hard-coded into a calculator, it reduces your ability to plan scenarios.

In other words, use retirement calculators to plan, test, and hypothesize your retirement future. They’re extremely useful when properly applied with a clear understanding of their inherent limitations.

It may seem like the task is impossible given the magnitude of potential error, but with enough practice in scenario analysis, you’ll find acceptable workarounds and solutions so you can plan your life in a way that will result in long-term financial security.

Obviously if you're not using something, you should cancel it. Why pay for something you don't use?

But I see a lot of "cancel your gym membership" recommendations listed as ways to save money. Most of the articles suggesting this say that it's cheaper to pay on a per use basis rather than have a membership if you use something sparingly.

This, of course, is true. But what often gets lost in the recommendation is this: if you use it, having a gym membership is a good deal -- and can save you a boatload of money!

I belong to a pool and swim several times a week. The per use cost (since I am a resident) is $2.50. The annual membership is $125 (I know, it's a steal -- but we paid for it in higher taxes since it's at the local high school). Because I am totally anally retentive, I tracked the number of visits I had to the pool the past 12 months. The number: 206.

If I had paid on a per use basis, these trips would have cost me $515. But instead I paid an annual fee and ended up saving myself $390. Pretty good deal, huh?

The Simple Dollar also suggests that your cost per hour for a membership should be $1 or less. (BTW, this number seems to be a bit arbitrary and I am not endorsing it, just highlighting what they say.) I am at the pool about an hour each time I visit, making my cost per hour $0.61. Again, not bad.

My point is that memberships are not all bad. If you actually use a membership, it can save you a great deal over a per use payment structure.

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader KT. She answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I'm a 26-year-old woman, single, no kids, renting an apartment. I live in a somewhat expensive college town in Virginia (it's the most expensive place I've lived, but obviously it's not Miami or New York). I make $39,100 a year, which pales in comparison to some of the salaries I see in these profiles, but I live very comfortably and am not pressed for money. Previously I've worked as a newspaper reporter/designer, making just $10 an hour, and as a technical writer for a really horrendous dental insurance company. I graduated with a degree in English right before the recession, in May 2008, and got the newspaper gig fairly quickly. I've never been unemployed, and I'm 99 percent responsible for myself--my mom still pays the family contract on our cell phones, although I bought the phone myself.

I have only just started watching my finances and investing in the last six months, so I am very much a beginner. I"m somewhat ashamed of how little I have in comparison to some of the brilliant readers I see on FMF, but I'm also really inspired and I want to get into the same great positions that some of you are in. I appreciate any input the readers might have, suggestions or criticisms, in order to ensure I'm on the right financial path.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

Obviously I'm the sole income earner. My take home pay, after taxes, amounts to $2550 a month. I write down every single expense, every day, and I break my monthly budget into these categories:

The Big Five: Rent, car payment, electric bill, water bill, medication. This is about $1447, the vast majority of which is rent. I worry I pay too much for rent, but the places I found for a few hundred dollars less were dumps, and my apartment is brand new and comparable to some other complexes in the city.

Groceries: $200 a month. Not just food but toiletries, cleaners, supplies for cats, etc.

Gas: $80 a month, but usually less, as I do l little traveling.

Savings: $390. $250 goes into a savings deposit which is my emergency fund (currently only $1500, but I'm building it steadily). $80 goes towards my car insurance, which I pay every six months. And $60 goes toward saving for Christmas and birthdays for family and friends.

Crap: I give myself $50 to spend on movies, eating out cheap, or having drinks with coworkers. Leftover money goes into the gift fund.

My expenses vary somewhat (gas and utilities, usually), so at the end of the month I usually have somewhere between $300 and $400 remaining. I leave this as a cushion in my account to ensure I never overdraft (never have, never will!), to cover unexpected but not emergency expenses like a dentist bill or property tax, and to save up to eventually buy some more mutual funds (see next section).

I don't give much to charity right now, so I spend a lot of time volunteering at the library and the local SPCA. I also don't have television or the internet (which is fantastic, really, and I highly recommend you Kill Your TV, You Will Feel Amazing).

What are the current financial issues you're facing (saving, paying off debt, etc.)?

I am extremely fortunate not to have any school debt. My parents paid for my college. I had some scholarships, worked part time, and graduated a year early to help save money.

I have two credit cards but no credit card debt. I have a crappy Capital One card with a credit line of $750; this is my oldest card, which I got shortly after college, so I leave it open to strengthen my credit. My new card is a Barclaycard Rewards MasterCard with cash back option. I just got this so I haven't really had a chance to try it out, but if I use it in place of my debit card, I'll get points to redeem toward cash. I've been good with credit and have never carried a balance from month to month, so I'm confident this will help get me a little cash back at the end of the year. The credit line here is $2,400, and I plan to use it for everything except rent (and savings, obviously).

The only debt I have is my car payment. I bought a new 2012 Mazda 3 Sport back in May. I make a payment of roughly $217 a month. If I just pay the minimum, I won't get it paid off until summer 2017. However, in June 2013, I plan to switch over that $250 going into my emergency fund and apply that right to my principal. In doing that, I will pay off the car in spring 2015. I wanted to build up an emergency cushion first. I'm not going to stop funding my emergency fund when I switch over to the car, I'm just going to cut it way back, probably to only $50.

I rolled over an old 401k that didn't have much money into a Roth IRA. I was able to buy only 1 mutual fund, so I'm saving that remaining money at the end of the month to buy a new fund. I want to have just three or four mutual and index funds in my IRA. I use T Rowe Price, and the fund I have right now is pretty moderate. I have two more funds I definitely want to buy, both high-risk index funds. Right now this IRA only has about $1,100. I am aiming to buy another fund in December.

I work for a nonprofit, which means salaries are lower but benefits are incredible. Because I'm young and single, 100 percent of my insurance is paid by my employer--health, dental, vision, short and long term disability, and life. (I also get a TON of time off, which is amazing after three years of newspaper work.) My employer also pays a stipend into a 403b every month without my contributing anything. This amount ranges from $350 to $400 and is put into a target date fund. So there's some money for retirement, plus what I'm doing with my IRA. Right now my 403b has about $2,500.

Once I get my mutual funds squared away, I will continue contributing the money left over at the end of the month toward the IRA, while still leaving a small cushion of protection. And when I get the car paid off, that will free up about $460 a month, some of which will go towards retirement, but most of which will go towards my emergency fund, which hopefully will grow large enough for me to put a downpayment on a small condo or house. (Home ownership scares the crap out of me right now, so I'll gladly wait a while so I can build a downpayment.)

What are your plans for the future (retire early, build your career, etc.)?

I don't ever want to get married or have kids, so any saving I'm doing is strictly for myself. I want to have enough money to put a down payment on a condo or townhouse, so I can support my mother if she needs it in her retirement, but that feels pretty distant right now. I'm not much into traveling, but more school is definitely in my future...

Career-wise, there are several classes I could take for my industry (which is production assistant at a medical journal). I would like to take classes like anatomy, microbiology, and genetics because they would boost my knowledge of my subject and open the door for medical editing. There are also a lot of certifications science and medical editors can earn, which will boost salary and secure jobs. I know how bleak print looks, but my heart is in writing and reading, and medical journals are fairly secure right now because they have much higher standards than regular journalism (which sometimes seems to have no standards at all). My journal also has a strong presence online and with a mobile app, so we're keeping up with publishing trends.

Otherwise, my goals are pretty nebulous. I don't have a set retirement date, because I love working and can't imagine ever not wanting to work. But I'm trying to be realistic and have money saved up. I don't want millions or something, just enough to live comfortably, like I am now. I appreciate any advice or different outlooks any of the commenters have to offer. I feel like I'm off to a great start, but I'm not entirely sure!

I'm still a beginner so I can only offer a really simple piece of advice: Write it down! I had no idea how much money was going to certain expenses each month, and I was really surprised once I spent some time studying my statements and tracking my expenses. (I also was oblivious to costs at the grocery store. I just put stuff in my cart, knowing I could cover it. Tracking that really opened my eyes and helped me cut down my grocery bill!) You can't begin to save unless you know how much it takes to cover your basic needs, and how much it takes to cover your vast wants. Write it down, especially when you're just starting.

Also, build a little play money into your budget. If you don't, you'll find yourself really hampered by not being able to splurge on movie tickets or enjoy a few beers after work on a Friday. Build it in, stick to it, and it will keep you from denying yourself simple pleasures--and from busting your budget.

For the rest of the year I'm going to be highlighting verses relating to the poor on Sundays as a reminder of why I'm doing my $25k Red Kettle Challenge. Here are two for today:

2 Corinthians 9:6-9 (NIV): Remember this: Whoever sows sparingly will also reap sparingly, and whoever sows generously will also reap generously. Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver. And God is able to bless you abundantly, so that in all things at all times, having all that you need, you will abound in every good work. As it is written: “They have freely scattered their gifts to the poor; their righteousness endures forever.”

Deuteronomy 15:11 (NIV): There will always be poor people in the land. Therefore I command you to be openhanded toward your fellow Israelites who are poor and needy in your land.

Remember, I'm matching your donations dollar for dollar, so everything you give doubles in value! If you'd like to donate, go to my online Red Kettle.

Mine is $3 million. I won't go into details in this post as to why it's at that level; I'll save that for another date. For now, that's my simple answer. If I get to $3 million in net worth, I will have hit my retirement number.

November 16, 2012

The following is a guest post by FMF reader Apex. He has been investing in rental real estate for more than four years and is authoring a Real Estate 101 series, posting every Friday, based on his experiences. (To read the series from the beginning, start here.) The series is designed to give prospective investors the basic tools they need to succeed.

Once you find a tenant the only task remaining is to manage the day-to-day operations of the property. This involves collecting rent, dealing with late or unpaid rent potentially leading to evictions, as well as handling the repairs and maintenance needed for a property. This area is one that often causes a sense of fear or lack of confidence among prospective investors. How does one effectively manage the property to deal with these issues?

I am going to answer 4 questions that I hope will relieve some of the anxiety in the area of collecting rent and handling repairs.

What do you do when a tenant is late or not paying rent?

The first thing I would recommend is that you make immediate contact with the tenant as soon as they are late. This is absolutely critical. You must not wait to do this. The first day after your late fee deadline, you need to call them or email them if they respond to emails. If you cannot get them to answer their phone or respond to an email within a few days and prior to the 10th of the month, you need to go knock on their door. I have not had to go to the door knocking step yet but I have come close when I was failing to make contact with them.

When you make contact you inform them that the rent is late and ask them when they plan to pay it. The next step is important. Listen carefully! They are now going to be telling you a story. I have gotten many of them. Some of them are a little strange, but strange things happen, especially with tenants. Your task is to determine if this story makes sense or is a delay tactic. If they do not give you a date certain when they will be paying the rent, you need to ask for one. If they do not know, that is your answer and you should move to an eviction. If they give you a date but their story has sounded questionable thus far you need to ask them where the money is going to come from. If they don’t know that or don’t tell a story that makes much sense to you, you should also consider moving to eviction. If the date is in the near future it’s probably worth waiting to see what happens.

I have found every one of my tenant’s late rent stories to be believable, even some of the strange ones. I have told them if they do exactly as they have told me there will be no issues. Every one of them has followed through as they stated. We will see someday if I can detect a fairytale that has an unpleasant ending since I haven’t been told one yet. It is worth noting that almost all of my tenant’s stories were as a result of the tenant contacting me proactively prior to the rent being late to inform me that it would be late and why. This type of story has far more credibility since a deceptive tenant is more likely to try to avoid contact. When I have had to contact tenants because of late rent, it is usually just them being sloppy, lazy, or dealing with paycheck issues.

There are a few typical types of stories you will encounter. People who are paid bi-weekly get paid on different days of the month each month. Many months that day will be just before or after your late fee date and they will need that check in order to cover the rent. Bi-weekly tenants often have beginning of the month cash issues. You should learn to expect it from certain tenants. Tenants have unexpected car problems, or other unexpected expenses. Family, friends and special occasions can cause them to spend money on things leaving them short of enough for rent. These things happen. Do not tell your tenants how to manage their lives or their money. They will not listen to you, they will resent you for it, and it won’t help you get paid. Your only task is to determine if they can come up with the money to pay you. Most people can dig themselves out of these issues in a month or two. It makes sense to stick with these tenants, let them pay a few late fees and dig themselves out. Evicting tenants who need a little more time, but will eventually have the money is not in your best interest.

If a tenant ever misses a deadline that they gave you, you should contact them immediately and ask for the rent. If they cannot produce it, you should move immediately to eviction. You want the tenant to find a way to pay. But at this point, it is now far too likely that they simply cannot. You must cut your loses and get them out of your property as soon as possible. The only thing worse than a vacant property is an occupied property that is not paying rent.

How do you do an eviction?

Eviction court can be scary. I have never been there, so it scares me a bit too. If I needed to do an eviction, the first thing I would do is attempt to get them to leave without having to do an eviction. I would give the tenant an in person Notice To Quit. I would tell them that I am beginning eviction proceedings. I would inform them that this will go on their record making it much more difficult for them to rent in the future. I would then tell them that if they were to move out voluntarily by a date of our agreement that is not too far into the future that I would have no reason to evict them. Depending on the circumstances if I could ensure they would be out much quicker than the eviction process I would even consider offering them a financial incentive to leave the property soon. I would really hate doing this. I would be paying someone as a result of them refusing to pay me rent. This would seem to be adding insult to injury. The truth is this is a business decision. Evictions cost money. They take some time, and are an extra hassle. It may be cheaper and quicker to pay them to leave.

If that does not work and you need to do an eviction I would recommend hiring either a service or a real estate attorney who specializes in doing evictions. They can do this for a reasonable fee in addition to the eviction fees. Hopefully this is an extremely rare event if you do your tenant screening carefully. The good thing is that in most states it is fairly straightforward and only takes a few weeks.

How should you handle repairs?

You know the level of handy work that you are comfortable with. If you do not have a mechanical bone in your body, you need a short list of contractors and handymen who do this for hire. My recommendation for finding them is Angie’s List. I have a multiple year subscription to that service and look up contractors on the service regularly. I have taken recommendations from friends and other investors. Their idea of a “good” contractor is often different than mine. On Angie’s List I can see ratings, other customer’s prices paid, and reviews that describe situations that I can tell I would be comfortable with. It’s the best tool I have found for finding good contractors.

If a wrench doesn’t frighten you too badly, give it a try. The tenant will be happy to see you quickly responding to their needs and trying to fix their issues. You might be surprised how many times it is something simple that you can easily fix. If you cannot fix it you simply inform the tenant that you will need to have a professional come and resolve the issue in a day or two. They will be pleased with either outcome.

I also recommend looking up the issue they are having on the Internet before going to the property. I have looked up countless issues involving fireplaces, washing machines, dishwashers, furnaces, you name it. If you can accurately describe the problem and the model of the appliance that is causing the issue you would be surprised how many times there are exact descriptions of how to solve it right there on the internet because someone else has asked the same question. Issues that I would have been going in blind hunting for a problem, I went in, knowing exactly what to look for and exactly how to resolve it because I had researched the problem on the Internet.

There are many tasks that I have attempted to fix without having any previous experience dealing with the issue. I was nervous that I would not be able to fix many of these problems but went to try to address them before bringing in a professional. I have now fixed leaky plumbing, fixed washing machines, replaced a motor on a furnace, replaced failed smoke detectors and light fixtures, fixed countless electrical outlets, and even replaced failed circuit breakers. I had never done any of those things prior to having rental properties. The more you do these things and research on the internet how to deal with them the more you will get comfortable doing them. I was fixing some plumbing at a property just a few weeks ago and was telling the tenant that I was not exactly a plumbing expert. He said “not yet anyway.” I laughed because he had touched on the truth.

I also do not recommend trusting the tenant to be able to properly tell you what the issue is or to follow your directions in trouble shooting it. It is almost always a good idea to go investigate the problem first even if you are going to bring in a professional. I had one tenant tell me their stove had burned out. The burners had sparked and the digital control panel went dark. I asked if they had checked the circuit breakers and they said they had and they were all working. I was prepared to order a new stove because the same thing happened to my personal stove and it had indeed fried the main circuit board. My gut told me I better verify it first so I came over with my voltmeter to check it out. I could not get any voltage so I went to check the circuit breakers. Sure enough the circuit breaker to the stove was tripped. I turned it back on and the stove was working again. The tenant was in a state of shock. They were confident they had checked the circuit breaker. I brought them to the box to show them the breaker that was tripped. I showed them the one that had the word stove written next to it. They meekly told me that they just checked the breaker that said kitchen because they assumed everything in the kitchen was on that breaker.

If your first call is always to a professional, you will waste money. For those using a property management company this is worth asking about. If the property management company’s first call is to a professional, they will waste your money for you as well. You need to go check these things out yourself first.

What do you do when an appliance fails?

All appliances fail. When they do I recommend having a place you can call that has good inventory and can get you a replacement at a reasonable price. I have an outlet store that I call. I tell them what I need, ask them what they have in stock in my price range and ask them to deliver it and replace the faulty unit. It takes very little time and very little involvement from me.

When you do replace appliances I do not recommend buying used appliances on Craigslist. I do not recommend buying extremely cheap appliances to save money thinking this is just a rental. You do not need appliances with lots of extra features, but you want a brand and model that is known to be reliable. I have even purchased models of certain appliances that are closer to commercial grade. I pay more for those but it serves two purposes. First it is projected to last much longer. In the long run that will likely make it actually cheaper than the cheaper models. Even more important is an appliance that doesn’t fail nearly as often saves me from having to make services calls to try to fix broken appliances or determine if they need to be replaced. Paying a couple hundred extra dollars for an appliance that is more reliable and lasts longer is a good investment.

Managing the property is an important part of real estate investing, but you do not have to do it all. You will find out which elements you can do yourself and for those you feel you can’t or simply do not want to there is a professional to help you with every one of them. If you can manage a home you live in, you can manage a home someone else lives in too.

November 14, 2012

A few weeks ago a reader emailed me and said he was looking for peer-to-peer (P2P) lending information on FMF and couldn't find anything. He wondered if he was missing what I'd written or if I simply hadn't covered the topic.

I told him that I write about topics that I know something about or am interested in. Since I have never tried P2P lending, I don't have much to say about it.

In his email the reader pointed to Lend Academy. He said had been reading that site as he was working on what he was going to do. I decided to check it out for myself.

The site was quite informative and gave me pause a bit because it said people were earning 10% back on their money through P2P lending (for example, here are the results from the site's author). I was skeptical but was intrigued enough that I was willing to use a bit of my own money to see if I could replicate these results myself. If I could, P2P would be a nice complement to my real estate investing efforts as I moved towards setting up my safest retirement scenario plan.

As I dug deeper, I found that some states allow P2P investing and others don't. Unfortunately, the information I discovered said Michigan did NOT allow it. Not sure if this was accurate, I sent Lending Club (the largest P2P company, the other is Prosper) an "Is this true?" email.

They responded promptly that yes, this was true. The wonderful State of Michigan (my sarcastic words, not theirs) limits my rights to lend/invest in this manner. So do many other states. They pointed me to this page for details.

However, I did have some options. The non-participating states prohibit investing in primary markets -- the original issuing of notes/loans. But they allow secondary investing, which is basically buying loans that others have made but want out of for some reason. I wasn't too excited about investing in notes others were trying to bail on. In addition, this market is MUCH smaller and likely couldn't give me the diversification and investment choices I would want. So it wasn't a viable option for me.

They also noted that if I was an accredited investor, I might have some additional options. Since I do meet the criteria, I called the contact they provided to see if I could make something work.

He reiterated the info above (no primary but secondary investing for Michigan residents). We talked about what I was looking to accomplish (10% return on my money) and he confirmed I met the definition of an accredited investor. Then he told me that accredited investors could invest in Lending Club’s "private offerings." From what I could tell, this is a group of combined loans that is managed as a hedge/mutual fund. Different people buy into it, Lending Club manages the loans/investments (for a fee, I'm sure), and income is paid out as the funds earn money. I believe he quoted an 8% to 10% range of average returns.

I was interested in this until he told me the minimum needed to invest in the private offerings: $500,000. Yikes! I was interested in testing P2P lending and proving that I could earn 10% returns with it. If I could, I would then add more of my portfolio to the effort. But there was no way I was going to start the process with $500k! That's too big of a "test" for me.

So that's where we left it -- me wanting to invest and him wanting to help me -- but there was nothing they offered that worked for me. I'm hopeful that the state of Michigan will wise up and let its residents begin investing in P2P lending (Governor Snyder, do you hear me? You should -- I sent you a note regarding this.) But for now, I'll have to watch from the sidelines.

November 12, 2012

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader RL. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

First, let me thank FMF for providing such a great place that enables us to share our stories, advice, and feedback! I have been a reader since 2010, have read the majority of these stories in this section and feel that it’s about time to share mine.

A little about me – I am 24 years old and was born and raised in a NJ suburb about an hour from NYC. I was very lucky to be born into a loving and supportive family, which my parents had always pushed education. Their thought was that education was the absolute key to financial success, as they did not have the opportunity of going to college when they were growing up. Hours of studying in grammar school through high school paid off and I headed off to a small private college located in NYC in 2006. My parents have modest incomes and even though I received a small academic scholarship, going into college I knew I would have to take out roughly $30K in student loans.

My Financial Story

During my sophomore year in college I had, what I call, an epiphany while working my summer job. That summer I was working as a parking valet attendant and saw something rather interesting. While parking the rows of expensive Mercedes Benzes and BMWs I kept noticing that the people throwing me their keys were people who had all the trappings of success, not because of education but of business sense and street smarts.

I kept hearing them talk of stock tips, business deals, and real estate. And something sparked – I wanted it, I wanted what they had! From that summer on, I read everything I could on stock investing, personal finance, budgeting, and saving. I wanted to graduate college debt free and start building my wealth asap no matter what!

I was fortunate to have saved a large bulk of my pay from that summer and opened up an online TD Ameritrade trading account. It was perfect timing – the Summer of 2008, the beginning of the financial crisis. I closely watched the markets, I bought up stocks that I thought were undervalued and took the risk while everyone thought I was nuts. Long story short, I turned a $5K investment made up of mostly grossly cheap blue-chip stocks and some speculative penny stocks into $20K within 8 months.

I graduated college with a small negative net worth (-$10K) and got a job right after graduation at a large financial institution working in their corporate finance department. I worked very hard in college to graduate a semester early with three majors and high honors. I am fully aware to be blessed and fortunate to have been hired so quickly after graduation, especially during this tough economy.

I lived at home for two years up until this May, which I managed to pay off my student loans in full within 6 months, build up an emergency cash fund, fully contribute to my Roth, and contribute 20% of my pay to my 401K (my company matches up to 7% but I really like the funds and who knows were social security will be when I’m old). I currently live in NYC with my girlfriend of 5 years.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

My girlfriend and I live together in a small 1 bedroom apartment in NYC. She also works in lower Manhattan and is very savvy with money. She was raised a little differently as I was because her parents had owned their own business and pushed her at an early age to have financial smarts over book smarts.

For the purpose of this post, I am only going to share my financials and monthly income and expenses.

I take home $68K/year, with the potential of a year-end bonus of around $5-10K.

Assets:

Emergency: 8,000

Savings: 10,000

Taxable Investments: 41,000

Roth IRA: 36,000

401K: 50,000

Liabilities:

$0 Debt

Total Net Worth: 145,000

Monthly Expenses:

Rent, Renters Insurance, and Utilities: 1,100

Cable/Internet: 50

Groceries: 200

Cell Phone: 75

Eating out/Entertainment: 400

Clothes/Dry-cleaning: 100

Gym: 130

Monthly Savings Plan:

Savings: 750

Vacation Fund: 250

What are the current financial issues you're facing (saving, paying off debt, etc.)?

One financial issue that my girlfriend and I are currently facing is living on our own in a high-cost area. Both of us lived at home for two years after graduation where we were able to save easily, I was able to pay off my student loans, go out to eat every weekend, and always managed to go on two vacations a year together. We were basically “living the life”, but in exchange we were dealing with a horrendous commute to and from work each day. We are happier to be living on our own now and we both are slowly learning how to lower our expectations of wants. Being on a budget is not fun, but we both give each other strength and remind ourselves of our goals. I also hope that life-style inflation does not creep into our lives as we are both career driven individuals.

What are your plans for the future (retire early, build your career, etc.)?

Our future plans are to get married within the next 3-5 years, buy a house and eventually settle down hopefully in the same town we are both from. Saving for a wedding, let alone an engagement ring, a down payment on a house, and other expenses gets me feeling a bit overwhelmed.

I also want to get my MBA sooner than later. My company currently provides a sizable reimbursement for going to school part-time while working. My plan is to apply to a top school in the city while working at my current job. If I get into a top MBA program, the cost out of pocket will probably be close to $75,000 even with my company’s tuition assistance.

Knowledge is power. I've learned so much from reading financial publications, books, websites and blogs over the last few years. One book I highly recommend to anyone who is serious about managing their own stock portfolio would be “The Intelligent Investor” by Benjamin Graham. Warren Buffet himself has claimed that this book is the best on the topic. I am also a huge fan of the “Rich Dad Poor Dad” series, except for the author’s downplay on the importance of education. One of your greatest assets that you have is your ability to earn, and for most of us that is from a career. Be smart on the ROI of college and always continue to work hard.

Last is: Be open to new ideas, but always go with your gut and intuition.

November 09, 2012

The following is a guest post by FMF reader Apex. He has been investing in rental real estate for more than four years and is authoring a Real Estate 101 series, posting every Friday, based on his experiences. (To read the series from the beginning, start here.) The series is designed to give prospective investors the basic tools they need to succeed.

It’s very important that you find good tenants, but once you find them you want to keep them.

The most costly thing to your rental business is turnover. It will cost you time, effort, and money. The most frustrating thing about turnover is that after all the effort and expense needed to freshen up the unit and find a new tenant, your business will not be improved. It will merely be returned to the state that it was in before you had a vacancy. Perhaps you can rent the unit for a slight increase in rent over your previous tenant but it will not be worth the effort and expense it took to turn it over.

The only thing better than a good tenant is a good long-term tenant. The ideal tenant would stay for 30 years. If you have a good tenant who is not looking to become a homeowner, you want to do everything you can to encourage them to stay for as long as possible.

These are a few of the things I recommend to retain good tenants.

Be a Good Landlord

Be fair. Be friendly. Be responsive. This is your house but it’s your tenant’s home. Make them feel comfortable in it. Be responsive to their needs and repair things quickly. Do not enter their home unannounced. In addition to being illegal in most states, it is a frightening invasion of privacy that will scare away good tenants very quickly. Be willing to be a little bit flexible on things that are not that important. Many tenants hold a non-flattering view of landlords. Be different from what they expect.

I have heard from other investors who own properties near mine and from prospective tenants who have talked with some of my tenants. They tell me that my tenants generally speak well of me. I have heard phrases such as “I have a good landlord” and “my landlord is a good guy.” Just because I am running a business does not mean I need to treat people harshly. I take pride in treating my tenants with respect, but it is also good for my business. Make no mistake; I am not a push over. I say no when it matters, but sometimes it doesn’t matter and saying no then doesn’t help you. Be firm but be fair. Your tenants will respect that.

Do Not Use Month-to-Month Leases

Month-to-month leases are nearly ubiquitous in the rental business. I have met very few people who do not use them. They seem easy. You can raise the rent at any time with proper notice. You can simply refuse to renew at anytime with proper notice. You don’t have to sign lease renewals each time a lease expires. It just makes everything easier.

However, if you use month-to-month leases you have no stability in your lease terms and have no control over when turnovers are likely to occur. This means your turnover may occur at inconvenient times for finding new tenants. It also means your tenants can decide to leave at any time if they happen to see a different rental opportunity they want to take advantage of. If they are locked into a fixed term lease they can’t pursue opportunities that occur before their lease ends. This requires them to plan their departure around the lease end date rather than getting a spur of the moment idea. The planning part doesn’t usually happen unless they truly have a reason to leave. This keeps them renewing your lease rather than exploring their options.

Have Long Leases

Some people prefer not to have leases longer than a year. This makes it easier to get rid of a tenant you don’t want and to raise rent more often if the rental rates are going up. Long leases do lock you into current rental rates but the amount of extra money you could get by raising rent $25 a month after a year is not worth as much as knowing you have a tenant committed to a lease for 2 or 3 years. It may be wise to keep the first lease to 12 months but once you have determined this tenant is a good tenant, I would encourage them to sign a longer lease. The tenant can ensure their rent is not going up which in turn will tend to make them want to stay. It also tends to encourage them to sign another long lease on their next renewal. I always offer my tenants the opportunity to sign leases longer than a year to lock in the rental rate. Many of them take me up on it. I never consider a long lease with fixed rent to be a detriment. I consider it a large benefit due to having a contractually binding multi-year revenue stream.

Raise Rent Less than the Maximum

When your lease comes due, this is the time to adjust the rent if the market allows you to do so. However I try to see what comparable properties are renting for and always keep my rent for renewals at or a little below the typical market rates. I do not want my tenants to feel like I am merely using the opportunity to gouge them and I do not want them to be able to easily find a comparable place for less. When I am finding new tenants that is when I try to get top market rent if I can. But after I have a good tenant I don’t want to risk creating turnover with excessive rent increases.

Do Not Rigidly Impose Fees

My lease has a $50 late fee if rent is not paid in full by the 5th of the month. The purpose of the late fee is very simple. It is to encourage the tenant to pay rent on time so that I do not need to chase after them to get it. Take note of what purpose the late fee is not intended to serve. It is not to act as a secondary revenue source. The late fee does bring in a little extra money every year but that is not why it is there. If that is actually part of your business model and you intend to squeeze as much extra money out of fees as possible, that is a mistake. Tenants know when they are being squeezed. I have a colleague who was renting a place that had a late fee if rent was paid after 4 o’clock on the third of the month. He paid them at 4:05 on the third of the month and was charged a late fee. Management had every right to impose that late fee and he knew it. That did not stop him from thinking they were greedy leeches. He didn’t stay very long either.

Depending on circumstances I have waived the late fee on countless occasions. I have been contacted by tenants letting me know they could not pay until a day or two late. I have had tenants send me most of the rent with a second small post-dated check asking me to deposit it 10 days later. I have had checks show up in the mail a day past the late date. Notice that in each of these cases, I do not have to chase rent. Unless there is a pattern developing I will typically waive the late fee in these situations.

Once a tenant is a couple days late and I have not heard from them, I start chasing the rent, and at that point I certainly will impose the late fee. If a tenant tells me they can’t pay rent until the 10th of the month I will impose the late fee then too. But rigidly imposing the late fee if they are late by 1 day or by $100 does not earn me any trust with the tenant. Most tenants do not have any emergency fund. There are going to be months when circumstances leave them unable to come up with the full rent on the 1st of the month. Letting them know that I am waiving their $50 late fee because they were pro-active earns me considerable appreciation from my tenants. That is worth far more towards retaining them as tenants than is a meager late fee once or twice a year.

By combining all of these techniques I am able to keep my tenants for extremely long periods of time. I have had 4 short-term 6 month tenants. They were just in transition and not going to stay anyway. Other than that I have only replaced 1 long-term tenant in over 4 years with 10 properties. The vast majority of my tenants are going on 3 or 4 years of tenancy. I expect many of them will continue on for years to come. This is worth its weight in gold to both my business and my sanity.

November 07, 2012

I am 29 years old, single and plan to get married in the next couple of years. I currently have about $110k in my Roth IRA and just shy of $40k in a SEP-IRA. My question is, later this year my boss will likely cut me a SEP check for about $20k, should I convert that $60k (or a lesser amount) to my Roth?

Obviously I would have to pay taxes in April on this – about 20% of the amount I convert – but do you think it makes sense long-term?

I have done a pretty good job of saving but my ultimate goal is retire in my 50s so if I have to pay a little more out of pocket now then it may be worth it, right? My dad disagrees and says, "why pay taxes now if you don't have to..."

I have the cash on hand to cover the conversion and I will still have some emergency money but I just want to be sure this is the best financial move for me. I was just reading that it could get more expensive for these conversions in the future....other things to consider include uncertainty of future tax rates, future value of my portfolio, etc.

November 05, 2012

If you've read Free Money Finance for more than five minutes, you know that I love, love, love Quicken. I have used it for 15 years or so to track every single penny I've earned, spent, invested and so on. It's been the perfect tool to keep me on track as I've worked to grow my net worth and I highly recommend the product.

The people at Quicken recently sent me a free copy of Quicken Premier for my personal use (thanks!) as well as a copy of Quicken Home and Business to give away to FMF readers.

Here's how it will work:

1. All you need to do to enter is to leave any comment on this post. Be sure to leave your email address (no one else will be able to see it) when you leave the comment.

2. In a week or so, I'll select the winner at random and announce the winner on this post.

3. I will email the winner, get their contact information, and arrange for them to receive their prize.

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader MD. She answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I’m 25, and my fiancé is 29. We’ve been together for almost 4 years now, and have been engaged for about 8 months. I own a condo in a college town in the Midwest. We are planning on getting married next Spring/Summer (haven’t picked a date yet, depends on venue availability).

I am relatively frugal compared to my fiancé, but I am known to splurge every now and then on special occasions. Not all of our friends are as financially stable as us, and we will occasionally pick up the bill for everyone at a restaurant, or at least take all the appetizers or desserts.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

We both work full time with large employers in the area. I work in the accounting office, my take home pay for the month is roughly $3,000 (average over the past year including overtime, some months less, some months a lot more). My fiancé is an IT analyst with a take home pay around $3,800 a month. Both of us could be making more in our respective fields if we switched from public to private. I work for the City, and he works for the University. That would most definitely require a move to a larger city.

Because we are not married yet, we each have our own separate checking/savings accounts and credit cards. We live together, so our monthly expenses are split as follows:

Me

Utilities ($130)

Condo Associate Fee ($150)

Gas ($90)

Groceries ($200)

Charity ($400)

Him

Cable & Internet ($90)

Cell Phones ($130)

Car Insurance ($180)

Gym Membership ($55)

Gas ($120)

Car Payment ($375)

Restaurants ($150)

I own my car, so I don’t have to worry about a car payment. I purchased it June 2011, put $10,000 down, and then paid the rest by March 2012. It was an expensive car, $34,000, but I’ve been saving for it since I was 20. My fiancé chose to lease his car, so he will have a monthly car payment for another two years.

We both contribute to our 401K, I contribute 6% and he contributes 5%, employer match is 4% for both. Currently, only I contribute to a Roth IRA; $5,000 a year, started in 2004.

We both have savings. He only has a general savings account, that’s currently sitting at $14000. He only started it about a year ago, after paying off all his student loans. I have three savings accounts. The first is my emergency account, there is $8000. The second is my wedding savings, currently at about $11000. The third is a general savings account for travel, gifts, splurges, etc. This one is at $3000.

The condo we currently live in, I own. I purchased it in 2005 with college money my parents and I had been saving. My parents started saving for my college when I was first born, and all the money I earned from babysitting and working part time in HS went into it as well. Back then, I purchased it for $98,000 plus closing costs. I don’t remember the final total. I do remember my parents pitched some additional money, just under $10,000, so I wouldn’t have to get a mortgage. I was lucky and was able to receive a full scholarship to the University here for tuition and partial board, and I received extra scholarship money that covered the rest including food and books for all four years. I also worked part time the entire time in college and saved the money I earned for my car. Currently, the property taxes are twice a year for about $1,400.

We try to travel once a year. This year, we are going to visit my sister in Hawaii for a week over Christmas. We have budgeted $4,000 total for the trip, hopefully we won’t spend all that. We currently have our plane tickets booked on sale for a total of about $1,600, and hotel room booked for $950. It sounds like a pricy one week vacation, but I am very close to my sister. It’s her first year away from home at school and she’s feeling very homesick, it’s also an excuse for us to go someplace warm over the winter.

Family is very important to both of us and we want to help out as much as we can. Luckily for me, my family is financially stable. His family is not in the same boat. His parents are divorced and both retired. Currently, only his father has savings, he was a college professor and so is very comfortable. He did just get married last winter, and his new wife has a middle school aged daughter. His mother and her husband do not. She was a teacher and he was a police officer, and they only have their pension to live off. While they own their home, and they have enough to meet their monthly expenses, they do not have enough for the big bills that come along. We helped them last year with their property taxes, are doing so this year, and plan to do so in the future. It is about $2,000 a year. To us, it’s not much and is worth it for family.

What are the current financial issues you're facing (saving, paying off debt, etc.)?

Saving is not an issue for me. My parents have taught me to save, and I’ve been saving all my life. This is different from how my fiancé was raised. Fortunately, this is not too much of an issue for us. We will argue at times over how much he wants to spend on new electronic toys, but he is good about talking to me first before buying. He’s also managed to curtail his impulse spending since being with me. For instance, he kept himself from buying the new iPhone 5 last week because while it’s new and cool, he doesn’t need it. His currently cell phone is not even a year old. Three years ago, he would have purchased it in a heartbeat.

We are financially very stable. One of the issues we face is requests for loans or a helping hand to make it through the end of the month. My fiancé’s brother is notorious for this. His brother married a foreign exchange student two years ago from Spain. He works minimum wage, while she does not work. She recently went back to school, and insisted on getting her license and purchasing a car. Throughout this ordeal, he came to my fiancé and me asking us to cosign a student loan, and then for money to purchase a used car for $5,000. They are constantly talking about going to Spain so he can meet her parents, but they don’t have the money. While I’m not opposed to giving his brother some money every now and then, I have strong feelings about giving out loans or cosigning loans. I recall a conversation earlier FMF started that was around this topic, and I’m comforted to know I’m not the only one who is opposed to personal loans or cosigning anything for a family member or friend.

I think our next step, is to look into saving more aggressively for our retirement. Getting my fiancé set up with an IRA. And then Stocks, bonds, investments, etc. If anyone has any suggestions or advice for me I would appreciate it very much.

What are your plans for the future (retire early, build your career, etc.)?

Our immediate plan for the future is to get married. I will admit, I haven’t been devoting as much time to this wedding business as I would like. I’ve just started, with my mother and my mother in law, looking at wedding dresses and looking at various venues in this area. I am planning to fund most of the wedding myself. My parents’ finances have taken a hit since the “recession” started. While they are prepared to help out, I would prefer not to take their money. I have a younger sister still in school. His father is financially stable but without a lot of discretionary income. He has offered to help my fiancé with funding the honeymoon or rehearsal dinner. His mother is not financially stable.

We would both like to build our careers, him in IT and me in finance. Both of us have advancement opportunities in our current place of work, and both of us are happy with where we work currently. But there’s a part of me that would like to move to a bigger city. I grew up in larger cities, my family moved across state lines six times before I graduated high school, so I’m use to change and excitement. He’s a townie, and has lived here all his life. I like this town and can envision raising kids here, but I also like the thought that at midnight if I’m craving food there’s always some place that’s still open and serving, versus everything closing at 9 PM.

Our third goal is also to purchase a house. I like to cook and would love to have a larger kitchen. My fiancé’s savings account is primarily to save for a down payment on a house. Of course we would like to save up as much as possible, but our goal is $60,000. Where we currently live, we could get a nice three bedroom house for between $300,000 and $350,000. We would probably keep the condo, it is about three blocks from the University and would make a great rental property.

My general philosophy is to save when and where we can, make informed decisions, but to not limit ourselves because of money. When we travel, when we purchase a new car or appliance, we don’t always buy the cheapest or most frugal option. But, we still track our spending, come up with a budget within our means, and ensure we have a backup plan in case things go wrong.

November 03, 2012

I would like advice on networking at the executive level. I am at a point in my career where I am getting interest from lower level executives at my company. I am certainly several steps away from their positions, but I would like to build the relationships into mentoring relationships. I have met these people for lunch and gotten time on their calendars. One has agreed to mentor me. I would like to build the relationships, but am unsure how to pursue. They are far removed from mentoring relationships that I have built with others and used to understand behind the scenes issues, seek out suggestions when dealing with difficult people, job frustrations, etc.

These are people who have shown interest in me first, for the most part. They are not viewing my activities day to day, at most they see me quarterly.

What is appropriate here? How do you break the corporate polish exterior and make a personal connection? What level of mentoring should one seek out from people in these positions?

November 02, 2012

The following is a guest post by FMF reader Apex. He has been investing in rental real estate for more than four years and is authoring a Real Estate 101 series, posting every Friday, based on his experiences. (To read the series from the beginning, start here.) The series is designed to give prospective investors the basic tools they need to succeed.

You always want to minimize vacancy time and get a property rented as soon as possible but never at the risk of a poor tenant. If it is taking a bit longer to rent a property than you had hoped it can be tempting to lower your standards and accept a tenant you might normally refuse. DO NOT DO THIS!

Vacancy is always preferable to a bad tenant. Nothing will cost your more money, more time, and more frustration. They are the cause of nearly every real estate horror story you have ever heard.

Something you need to keep in mind when you are deciding what properties to buy is that your tenant quality will be tied to the quality of your properties. If you have older dated properties in less desirable neighborhoods, it will be more challenging to find good tenants. There are still good tenants to be found for most properties, but your overall tenant quality will inevitably suffer if your properties are of poorer quality.

If you have good properties finding good tenants is not that difficult. Regardless of what type of property you have, finding good tenants involves a good advertising strategy, carefully crafted policies on who you will reject, and good screening tools.

Advertising

Your advertising must be on the Internet. Classifieds and print advertising is dead. There are many places on the Internet to list rental advertising but I have found that the only one that you really need to use is Craigslist and of course it’s free. I have tried some of the pay services. I found very few prospects from them and have never found a qualified tenant through any of their services. The key to good advertising exposure is the place with the most traffic, and right now Craigslist appears to be the dominant place where people search for housing.

The most important thing about your ad is that it must include pictures of your property. I would have to be desperate before I would contact a landlord about a property to live in that didn’t show pictures. Good tenants want to see pictures. Tenants who don’t need to see a picture don’t care what it looks like when they move in. They won’t care what it looks like when they move out either. Never put up an ad without pictures. By doing so you are reducing the number of tenants who will consider your property and self-selecting from a worse tenant pool.

The pictures should showcase your property well but accurately. Resist the temptation to make your property appear better than it is. If your property is older in an older neighborhood and all you show is the updated kitchen and bathroom with granite counters, that is not an accurate representation of what you are renting. This will result in wasted showings as none of your potential tenants will be interested when the real property falls short of what was advertised.

Your ad does not need to be long with flowing prose. It merely needs to list the facts that are most relevant in a concise fashion. If you have any restrictions list those in the ad as well. You will still get calls about pets even if you say no pets, but it will reduce some of them. The goal is not to get calls or showings. It is to get a tenant with the least amount of time and effort on your part, so make your ad as specific and accurate as possible.

From my experience, the best time to find tenants has been 45 to 15 days prior to the unit being available, with the most interest coming on the 1st through the 15th of the month before it is available. Once you get passed the 15th of the month interest generally slows down. That’s getting a little close to the end of the month for most people. Responsible tenants generally do not wait until the week before they are homeless to find their next place. You should make sure all your tenants meet your qualifications but you should be extra certain for someone who applies on such last minute terms.

Policies

Make sure you have a list of policies that spell out the reasons you will reject someone. This is important because it keeps you from taking a risk you know you shouldn’t, and it also helps to protect you against discrimination lawsuits. Discrimination in housing is not to be taken lightly. The penalties for doing so can be very costly. Federal law prohibits housing discrimination on the basis of race, color, national origin, religion, sex, family status, or disability. Many states have additional restrictions such as sexual orientation, age, etc. If someone sues you for discrimination you need to have a valid and defendable reason why they were denied. Having policies that you strictly follow and having the prospective tenant sign a copy of them prior to applying will be very helpful if you need to defend yourself. Policies themselves can be considered discriminatory so be careful that your policies cannot be construed as discrimination based on how they are written.

Some of the policies that I consider most important focus on the ability to pay and the history of tenancy. I require income that is at least 3 times the rent, no previous evictions, no recent criminal record, and only a few delinquent payments on the credit report.

Screening

There are 4 things that are important to evaluate during the screening process.

1. Past rental history. This is the most important item. If they have been evicted before, you may have to do it again. If they have had a history of not paying rent they will do it with you as well. Make sure your credit screening service shows you evictions and always contact any previous landlords. I deny anyone with previous evictions or previous refusal to pay rent.

2. Ability to pay. If their income is low or from questionable sources, they will have difficulty finding the rent each month. They may want to pay you but that doesn’t really make your situation any better if they don’t have the money. If they cannot pay you will eventually have to take action perhaps including eviction. Your screening service should either do employment verification or you will need to do it by contacting their employer. If the applicant does not have sufficient income I will deny their application.

3. Criminal history. Your screening service must provide criminal background checks. If an applicant has a history of being involved with drugs or other criminal activity, they are going to bring that to your property and your neighborhood. Their problem will become your problem. If it spreads to your neighbors they will make it your problem as well. You should avoid anyone who has any kind of recent criminal activity.

4. Credit history. Most screening services include credit history. Some people will not accept tenants with a credit score below a certain number. This is a simple and easy way to do a credit assessment, but I prefer to look at recent delinquencies instead of credit score. Having a bankruptcy or foreclosure will destroy someone’s credit score and there are many people in that situation right now. But if you look at their credit report you will often find it is just the mortgage they couldn’t pay or perhaps one big medical expense forced them into bankruptcy. Their inability to pay their $3,000 mortgage doesn’t shed much light on their ability to pay my $1400 rent. The low score from one big event doesn’t bother me nearly as much as a list of delinquent accounts. Too many delinquent accounts is an indication that they can’t keep up and eventually that will include rent. That’s why my policies list too many delinquent accounts as my criteria for denial rather than a particular credit score. I know that policy is a bit vague. What qualifies as too many is a judgment call, but the policy has worked well for me. I have some very good tenants with credit scores that are abysmal but they only have a few minor delinquent accounts.

You can learn a lot about a tenant by talking to them and talking to their past landlords or getting the landlords to fill out a form about their rental history. They will almost never answer judgment based questions like were they a good tenant. Most will answer questions like how much was their rent payment; were they ever late and how often; did they ever refuse to pay rent and how was it resolved; Were there any complaints or damage issues that they caused and if so what.

These are all fact based questions that most management companies have a documented history for and do not have a problem sharing if you have a signed form from your candidate allowing them to release these records. The application that I have tenants fill out for my screening service has them sign a release that gives me and my screening service access to this information.

Your gut often gives you a good initial sense and you should not ignore it, but you should not rely on it exclusively either. You need to verify it with information. Both because using your gut could get you into a discrimination lawsuit and your gut can be wrong. Always make sure you do proper information based screening which includes rental history, income verification, criminal history and credit history.

Finding a good tenant sometimes takes a little patience, but it is time well spent. Careful selection of good tenants is the most important decision you will make about the day-to-day operations of your real estate business. Many decisions are important but if you consistently get the tenant decision wrong, none of the other decisions will really matter much.